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Consumer-directed health plans, HSAs, and catastrophic coverage

"Consumer-directed" is the buzzword in health coverage these days, but most people probably couldn't tell you what, exactly, it means. What does it have to do with catastrophic plans? And is an HSA the same thing as an MSA (or even as FSA)? Today, the New York Times has an excellent story on consumer-directed plans that explains a lot, but here we'll try to give you an overview at a glance. Consumer-directed health plans are defined by a number of key features, including high deductibles, health care spending accounts, and tiered benefits. (For a comprehensive description, see the California HealthCare Foundation.) The idea behind consumer-directed plans is that if consumers have more discretion in, and responsibility for, their medical spending, they'll drive the market toward greater efficiency. Thus, they generally offer a high deductible--starting at $1,000. The possible downside is that people will consequently avoid routine, preventive care if they have to pay for it out-of-pocket. HSAs, or health savings accounts, are often tied to these high deductible plans. With an HSA, you can set aside pre-tax dollars through an employer, or tax-exempt dollars if you're self-employed, to use toward medical expenses. The money in that account can be invested, and at the end of the year, it remains yours. HSAs used to be called MSAs, or medical savings accounts. An FSA, or flexible spending account, is available only through an employer. It, too, is a pre-tax account for medical expenses, but the money is held by a third party (usually a payroll company) and cannot be invested. You gain access to the funds by submitting your expenses for reimbursement, but whatever you don't spend at the end of the year is lost. Many high-deductible catastrophic plans, such as Freelancers Union's PerfectHealth EPO Platinum, are tied to HSAs. The idea is that the money you save in your HSA can be used to cover your deductible, if necessary. However, if you get sick soon after enrolling, you'll have a large deductible to pay and you may not have accumulated the savings to cover it. On the other hand, if you don't use much health care, you'll likely have saved up enough to cover the deductible by the time you have a major medical expense--and, ideally, you'll have earned interest on that money in the mean time, since you'll have been able to invest it.

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